Showing posts with label INDIRECT TAX. Show all posts

Tuesday, January 7, 2025

INDIRECT TAX,SECURITIES TRANSACTION TAX, SPECIFIC TAX, ADVALOREM TAX, Angel Tax, CUSTOM DUTY

INDIRECT TAX:

Those taxes which are not directly levied on the Income of an Individual.
This tax is indirectly levied on the Expenses incurred by the Individual.
This tax is basically levied on the seller of goods but finally it is being paid by the end consumer.
Examples: GST, custom duty

In case of indirect taxes, Tax impact and Tax incidence are borne by different person through the process of Tax shifting.

EXAMPLES OF INDIRECT TAXES

SECURITIES TRANSACTION TAX:

Securities Transaction Tax (STT)is an Indirect Tax levied on the transaction of securities (Tax Laws & Rules > Acts > Securities Transaction Tax (incometaxindia.gov.in)
Securities Transaction Tax (STT) is imposed on a broker rather than the investor/trader directly.
Broker /Stock Exchange deposit it on the behalf of the investors.
Securities Transaction Tax (STT) is currently imposed on equity and derivative transactions.

ADVALOREM TAX:

The value of AD VALOREM Tax depends upon the value of a transaction.
AD VALOREM Tax is directly proportional to the value of the underlying asset
AD VALOREM Tax is imposed at the time of transaction .
The nature of AD VALOREM Tax is progressive in the sense that the value of tax will increase with increase in the price of the asset.
AD VALOREM Tax is usually expressed in percentage.
Example GST in India.

SPECIFIC TAX:

Specific Tax is per-unit tax, which is a fixed amount of tax imposed on the quantity of a particular good.
Specific Tax does not depend upon the price of the goods, unlike the advalorem Tax which depends upon the price of a good.
Specific tax is levied based on the volume of the item purchased.
Specific Tax is regressive in nature.
The tax is usually expressed in specific sums.
Example: Excise Duty on Petrol.

Angel Tax:

Angel tax is an income tax payable on capital raised by unlisted companies from investors .
Unlisted companies raise money mostly from the angel investors
Angel tax is imposed on issue of shares if the sold share price is excess of the fair market value of the shares.
The excess of share price over the fair market price is treated as income and it is taxed accordingly.

For instance:

If the fair market value of share price of Zomato is Rs. 100 per share and the company raises fund at Rs. 250 per share which is significantly higher than its fair market value. In this case, the excess premium collected by the company (which is an unlisted company) over its fair market value i.e. Rs. 150 per share will be treated as income from other sources
Consequently, tax shall be applicable on this surplus amount which is referred to as Angel Tax.

DYNAMICS OF ANGEL TAX:

The imposition of angel tax depends upon the fair market valuation of the company.
Fair market valuation has been a bone of contention between startups and the income tax department.
The tax department goes by the rule book and calculates market value based on the net assets of the company.
On the other hand, future growth prospects of the startup is a major factor in determining the fair market valuation of the startup.
Difference in calculation of the market value by the income tax department and the fair value by the investor of the startup results in Angel Tax.
Angel tax wipes away a major part of the surplus of the startup which can be invested.
Thus, Angel Tax hurts the growth prospects of the start- ups.

Budget 2024-25 has removed Angel Taxation.

CUSTOM DUTY---

Custom Duty is an Indirect tax that is levied on imports (and, sometimes, on exports) by the government.
The objective of Custom Duty is to protect the domestic industries from predatory competition from abroad and to raise state revenues as well.
The rates of customs duties are either specific or on ad valorem basis, that is, it is based on the value of goods.

Example:

Countervailing duties

Safeguard Duties

Anti-dumping duty

Wednesday, January 1, 2025

TAXATION, CANONS OF TAXATION,TAX IMPACT,TAX INCIDENCE,TAX SHIFTING,DIRECT TAX,INDIRECT TAX

Funds are required by the government to carry out their functions ie developmental as well as day to day functions. Taxation provides funds for carrying out such functions.

TAXATION:

Taxation is a legal compulsory payment by the citizens to the government.
There is no quid pro quo relationship between a taxpayer and the collecting authority.
Taxpayer can neither claim any specific benefit against paid taxes nor it can ask its taxes back if desired services are not provided by the government.

CANONS OF TAXATION:

The most fundamental classification of taxes is based on who collects the taxes from the tax payer.

As Per Adam smith, Taxation should follow the following canon of taxation :

Canon of ability :taxes should be paid as per the ability .
Canon of certainty :rate of taxes should be clear with out any ambiguity .
Canon of convenience :The tax collection method should be convenient so that people can pay taxes easily.
Canon of economy: Government should impose only those taxes whose collection costs are very less and cheap as there are collection costs undertaken by the government.

Anecdotes related to Taxation:

In Mahabharat:

Krishna started his campaign against kansa by not paying Income tax imposed by Kansa and krishna argued that kansa has abdicated his responsibility as a king so people should not pay the taxes.

In Ramayana:

Shri Rama pointed out that it was necessary to collect tax from the subjects.
But the tax should be taken by a king in the same way as the sun absorbed water from the earth.
In reservoirs and rivers, where there was more water, it took more; from the land where there was less water, it took little.
In the same way it was also the duty of the ruler to make it clear that the tax collected from the rich people of the state should be distributed equally for the works in the larger interest of the people.

TAX IMPACT:

The term Tax impact is used to express the immediate result of imposition of the tax.
The impact of a tax is on the person on whom it is imposed first.
Thus, the person who is liable to pay the tax to the government bears its impact.

TAX INCIDENCE:

Tax incidence is liability of the tax payment on the man’ who ultimately bears the

burden of the tax.

TAX IMPACT vs TAX INCDENCE:

Tax Impact refers to the initial burden of the tax, while Tax incidence refers to the ultimate burden of the tax.
Tax Impact is at the point of imposition while incidence occurs at the point of settlement.
Tax impact of a tax falls upon the person from whom the tax is collected and the incidence rests on the person who pays it eventually.
Tax Impact may be shifted but Tax Incidence cannot be shifted.

TAX SHIFTING:

Tax Shifting is passing of the tax from the one who first pays it to the one who finally bears it.
It is through this process of Tax Shifting that the impact of a tax is transformed to Tax incidence.
Tax Incidence is the end of the shifting process.
Direct tax are example where Tax impact and Tax incidence are borne by the same person

while

In case of indirect taxes, Tax impact and Tax incidence are borne by different person through the process of Tax shifting.

TYPES OF TAXATION:

Taxation can be in the form of: Direct Tax and Indirect tax.

DIRECT TAX:

Direct Tax is a tax that is paid directly by an individual or organization to the imposing entity .
There is no Tax Shifting as tax impact and tax incidence is on the same person.
A taxpayer pays direct tax to the government for different purposes.
Tax payment cannot be shifted to another individual or entity.
Direct taxes include income tax, Property tax, capital gains tax, Direct Dividend Tax, corporate tax etc.
Income tax is the most popular direct tax.

IMPLICATIONS OF HIGHER DIRECT TAXATION:

Direct tax collection accounted for 55% in FY 2022-23 which was 4 year high .
A higher direct tax to indirect tax is considered as progressive in the sense that indirect taxation hurts the poor more intensely.